Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: In the hypothetical situation provided, 1. what is the employee's taxable benefit and 2. what is the amount of consideration for FTS purposes?
Position: 1. Question of fact and law. 2. Unable to answer as the share issued would be a "prescribed share" for the purposes of the FTS rules.
Reasons: 1. The taxable benefit must be determined in light of the specific factors and the law. 2. Subparagraph 6202.1(2)(b)(iv) of the Regulations.
XXXXXXXXXX
2013-049764
T. Posadovsky
November 21, 2013
Dear XXXXXXXXXX:
Re: Stock options and flow-through shares
This is in reply to your email of July 13, 2013 concerning whether certain shares issued to an employee under a stock option plan can qualify as a "flow-through share" ("FTS") as that term is defined under subsection 66(15) of the Income Tax Act (the "Act"). We apologize for the delay in responding.
You have requested our views with regard to a hypothetical situation in which an employee of a principal-business corporation ("PBC"), also defined in subsection 66(15) of the Act, is granted a stock option, at no cost, which gives the employee the right to purchase shares of the PBC at a specified exercise price. You also wish to know whether the consideration paid for the purposes of a FTS agreement would be the fair market value of the shares acquired, or the amount paid by the employee (exercise price) to the employer to acquire the shares.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Section 7 of the Act ensures that benefits derived from stock options received by virtue of employment are treated as employment income. We are unable to comment on the amount of the benefit or any deductions available in the hypothetical situation you described as the tax consequences resulting from the exercise of a stock option is ultimately a question of fact and law that must be determined on a case-by-case basis.
In respect of your second question, a share issued by a PBC will qualify as a FTS only if it satisfies the requirements of the definition thereof in subsection 66(15) of the Act. Among other things, the share must not be a "prescribed share" within the meaning of sections 6202 and 6202.1 of the Income Tax Regulations (the "Regulations"). The prescribed share rules are very broad, and refer to certain terms that are contained in the agreement in respect of the share or its issue. In particular, subparagraph 6202.1(2)(b)(iv) of the Regulations applies to situations where the corporation or a specified person provides any assistance whatsoever to help a person or a corporation to acquire a new share of the capital stock of the corporation. Generally, under a stock option plan, the corporation is providing a financial incentive to the employee by allowing the employee the right to acquire a share at a pre-determined price that may be less than the market price. It is our view that a share issued under an employee stock option plan would be a prescribed share by virtue of subparagraph 6202.1(2)(b)(iv) of the Regulations and, consequently, would not qualify as a FTS.
We trust that our comments will be of assistance.
Yours truly,
Fiona Harrison, CPA, CA
Manager
Resources Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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